Cloud economics
The cloud introduces new business models and economics as companies shift their expenditure, spending less money on setting up (e.g., servers) and more money on operations instead.
Companies are saving costs by:
- reducing staff and equipment cost (as staff is not needed to maintain physical data centres and equipment + maintenance is not needed); and
- leveraging pay-on-demand cost models for the right-size capacity (where resources can be increased to meet peak demands and reduced to meet low demand; paying for only what you use when you use).
# Types of expenses
There are generally two types of expenses used within cloud economics:
- capital expenses (CAPEX): the one-time funds used by a company to acquire, and upgrade physical resources; and
- operational expenses (OPEX): the ongoing funds used by a company to keep running the business.
Capital expenses are used to set up private clouds, and they are generally high in cost initially and hard to change once purchased. It also takes a long time to deploy.
Operational expenses are more pay-as-you-go, making it easy to deploy new requirements quickly and to adapt to new applications.
The total cost of ownership is the sum of capital and operational expenses; expressed mathematically:
$$ TCO = CAPEX + OPEX $$ where:
- $TCO$ is the total cost of ownership;
- $CAPEX$ is the total capital expense; and
- $OPEX$ is the total operational expense.